The Biggest Challenges faced by Marijuana Businesses in the USA

Legalizing recreational and medical cannabis made US rise its revenues and profits

The legal cannabis business goldmine isn't as easy as it seems

Both revenue and profits from the US Cannabis industry are growing exponentially. California, Alaska, Nevada – all have recently legalized recreational marijuana, making it 33 states, including the District of Columbia, that have legalized the use of pot in some form, either for medical reasons or recreational or both.

Even so, the journey as a Cannabis business owner from setting up to profitable business can be bumpy and challenging to navigate. Cannabis entrepreneurs have to face additional obstacles that traditional businesses don’t. There is strict regulation at both a National and State level to track. Getting a bank account can be hard. Your accountant and lawyer will need to be up to speed on the changing landscape. Even tax legislation differs for Cannabis businesses from the usual rules which are in place for other companies.

Whether you already own a cannabis business or planning to jump into the one, you must familiarize yourself with the challenges faced by the marijuana industry in the USA.

Confliction between State/Federal laws

Despite an increasingly liberal attitude towards Cannabis, as a growing number of States have legalized medical marijuana (some authorized recreational marijuana businesses as well).

Federal Cannabis law remain strict. The Federal government views the drug as a Schedule 1 Drug. That’s an abusive and harmful substance with no evident medical applications. Because of the federal view, doctors don’t prescribe marijuana, which might subject them to liability. Also, weed cultivators and distributors are unable to insure themselves in every case, as they’re associated with a product that’s illicit under federal law.

Sessions ended the Obama-Era Marijuana Policy

In August 2013, Obama-era Cole memorandum suggested for the first time that there was no point imposing Federal marijuana laws against consumers and businesses in weed-legal states.

However, in January 2018, Attorney General Jeff Sessions rescinded the memorandum giving attorneys the green light to aggressively enforce federal laws against marijuana, even in states where pot is legal.

The obvious consequence of this conflict between State and Federal expectations is the potential for Federal prosecution for engaging in a Cannabis business which your state allowed. Other conflicts have many not-so-obvious consequences, for weed businesses, too, such as:

Leasing challenges, as many landlords are unwilling to rent to marijuana businesses as they fear to lose their property in a federal civil asset forfeiture action.

The Federal Bureau of Reclamation that serves many areas in the Western USA has advised that the Department of Justice must report marijuana farmers who use Federal water to irrigate their crops.

Marijuana business can’t take advantage of federal bankruptcy laws.

Since the CSA considers marijuana illegal and the United States Patent and Trademark Office requires the applicant to show the lawful use of the mark in commerce to register it, it’s nearly impossible to secure a federal registration of a marijuana-related mark.

Compliance Issues

Navigating through the ever-evolving regulatory landscape of Cannabis is making it nearly impossible for Cannabis businesses to stay compliant. Because cannabis businesses spend so much time dealing with the constantly changing local and state regulations, they often lose confidence in their compliance liabilities in regards to the payroll tax, labor laws, etc.

For instance, the Bureau of Cannabis Control (BCC) in California, outlined it’s statutory and regulatory requirements in July ‘18. As per the new mandatory rules, set out by the BCC:

For instance, the Bureau of Cannabis Control (BCC) in California, outlined it’s statutory and regulatory requirements in July ‘18. As per the new mandatory rules, set out by the BCC:

Only lab-tested products that meet testing requirements can be sold in the state.

Edibles must not have 100+ mg of THC per package. Each edible must be separated into 10 mg servings.

These new testing and packaging requirements forced a lot of weed brands, who had established themselves in CA between the time Cannabis was legalized and the time these rules were put in place. Many had to quit because of their inability to meet the testing requirements of their products.

Similarly, new rules come in most days which make many Cannabis businesses, non-compliant with the local or state regulations.

Ability to expense business costs for tax reasons

As with other legal businesses, legal marijuana businesses must also operate in strict compliance with local, state and federal tax laws. However, in the USA, the marijuana industry throws entrepreneurs into the tax treatments of state and Federal laws.

Federal income taxes generally follow a simple formula with which we’re all familiar: Calculate taxable income by subtracting business expenses –such as rent, employee wages, and utility bills – from gross income and then pay taxes on this amount.

Tax compliance for Cannabis businesses is part of aSstate-legal marketplace and includes an understanding of IRC Section 280 E. Code Section 280E prohibits tax credits or deductions from gross income of the businesses associated with the trafficking of Schedule I or Schedule II drugs. As Cannabis is a Substance I substance, pot business owners have to pay tax on their gross income. As a result, they pay taxes on gross businesses and often end up paying tax rates higher than 70%.

These extra taxes are payable simply because the IRS (Internal Revenue Service) still enforces a 1982 Federal law that bans all deductions or tax credits on trafficking illicit drugs. Engaging in weed is still classified as illegal trafficking at the Federal level. If a Cannabis business owner doesn’t report all of his/her revenue from the marijuana business, (i.e. they attempt to side step the law and include some costs they shouldn’t) the IRS can accuse the person of tax evasion.

Some hope may exist for reforms that businesses see as exasperatingly obvious. The Trump administration is, as we speak, planning reclassification of Cannabis and seeking public comments on the topic. Legalization advocates are hopeful that the conclusion of this international review of marijuana by WHO will lead to a pro-reform conclusion, putting everyone in the Cannabis space at ease.

State Taxes on Marijuana Business

Each State that has legalized marijuana has tasked pot businesses with paying taxes. The exact amounts variy from State to State. While all States enforce a sales tax on weed sold, some also impose excise duty on the drug. For example, in Alaska, marijuana businesses have to pay an excise tax on the sale or transfer of pot from a cultivation facility to a retail store or manufacturing unit. In other states, they don’t.

In Colorado, marijuana retailers have to get a sales tax license for each type of marijuana. Also, businesses engaged in medical marijuana in Colorado have to pay state sales tax plus local sales taxes. Similarly, California imposes a 15% excise tax upon cannabis buyers.

Since marijuana taxes vary widely from state to state, marijuana businesses must research their particular state’s law to understand their financial liabilities.

Lack of Banking Facilities

It can be hard for the cash-heavy Cannabis industry to find banking services and financial support. Most banks refuse to serve marijuana businesses due to security concerns. Some are even overwhelmed by the volume and size of the approaches they are receiving, citing a lack of sufficient funding to scale the fast-growing industry.

Banks are ‘afraid of’ both the Controlled Substance Act, which still counts marijuana illegal Federally and in the area of anti-money laundering laws. Any bank that serves legal marijuana business, for example, faces possible criminal prosecution for ‘aiding and abetting’ money laundering. That’s a Federal crime.

Banks that choose to serve a legal Cannabis business have to file a suspicious activity report for every transaction involving a marijuana business. These rules extend to everyone, from accountant to the cleaners, involved in the business. It’s administration which most banks choose to avoid. Also, most marijuana business owners cannot pay their payroll taxes by check, make a wire transfer to their business or accept credit cards in payment for the Cannabis they sell (hence all that cash). Federal banking restrictions also prohibit cannabis businesses from listing on the U.S. stock exchanges.

The truth is, for the Cannabis industry to flower, requires access to commercial banking services. Without banking, people cannot access loans to expand their business and add new staff.

Reps. Ed Perlmutter (D-CO) and Denny Heck (D-WA) are taking a stand and submitting a bill in the hope that Congress will support their SAFE Banking Act that would address this banking crisis in the cannabis industry and align federal and state law.

Staffing Challenges

The exponential growth of the pot industry has led to a new and unexpected challenge –staffing all of the new retail outlets that are popping up on high streets in legalized states. Increasing profits require entrepreneurs and business owners to add in more staff. It’s a great problem to have with so many people so vocally looking for work. Usually, this would be a nice problem to have but that’s not the case in the cannabis industry.

As of now, there is no degree or diploma available in the marijuana industry. It means the traditional recruitment approach and parameters won’t help recruitment for cannabis businesses. They can’t simply place a help-wanted sign on their storefront windows and hire the able-bodied candidates. Also, it’s important for these businesses to weed out individuals who are seeking a way to access pot by entering into the business from the ‘job’ door.

Cannabis industry demands creative, interactive and qualified workers. Although there is no shortage of entry-level applicants, the pool of experienced and skilled professionals is small for areas, like accountants, IT experts, C-suite operations, human resources, etc. is limited. Also, training, certification and licensing of employees add to the expenses of a cannabis business.

Conclusion

The good news is as the cannabis industry continues to be accepted, decriminalized, and legalized; these challenges are likely to be smoothed out soon in the coming years.